The oil and gas industry has a long history of innovation, from its inception in the 19th century through to today’s digital age. There is no doubt that the industry today is under increasing pressure on a variety of fronts – conventional oil’s role is diminishing; prices have dropped by almost half, putting pressure on revenues and costs; as we face increasing environmental issues, we are in an energy transition, shifting toward lower-carbon solutions. A panel at the World Petroleum Congress in Istanbul discussed technology and innovation and their impact on the oil and gas industry. Not surprisingly, given the challenges mentioned, much of the discussion at this senior level focused on where the industry is going. The only way forward is to continue the history of innovation that has driven the industry.

Thinking beyond product innovation

We must think of innovation as more than just product innovation; it encompasses more than existing products, processes and customers. Further to this, it is not something to simply “leave to the engineers.” It involves everyone and we can streamline processes or establish new business models without new technology or equipment.

There is much agreement among oil and gas executives that innovation matters. However, a study that examined how oil and gas companies are adopting innovation found that executives are spending progressively less on research and development, the result of which is, among other things, a decrease in the growth of patents. So on the one hand, our industry knows it needs to innovate; on the other, it’s not spending enough because of financial pressure.

Currently, according to the same study, executives across industries agree that best practice is to spend 70% of resources on innovations within the core business, 20% on adjacent innovations, and 10% on transformational ones.

In reality, oil and gas executives spend a full 86% on core innovations and a mere 3% on transformational ones. As such they are spending most of their funds on optimizing their core business and very little on transforming it.

Hydraulic fracturing in the U.S. is a great example of transformative innovation in our industry. While it is true that some of its success could be attributed to technology, much has to do with how the market space was configured. It has quicker returns, lower risks and is easier to ramp up and down. Its success was based on a strong entrepreneurial culture, a strong knowledge base, and readily available capital. It was also brought about by the existence of many players and their broadly diverse regional approach, which encouraged the rapid takeoff of unconventional development. That part of the industry also takes a page out of manufacturing industry’s playbook in that it is based on a repetitive model, which can significantly reduce costs. Importantly, while big players are heavily involved now, all this innovation was done primarily by smaller operators, not necessarily by large national or multinational players.

The innovation ecosystem

So what does innovation in our industry involve? According to several publications and regional research the key areas for innovation range from Configuration (connections with others to create value); to Offerings (products); to Experience (delivering to customers). Most oil and gas executives seem to recognize that there is significant value in configuration, the part of the spectrum involving collaboration, but they perceive gaps in their companies’ capabilities in that area.

Changing the way of doing business will require that we view ourselves as part of an industry ecosystem in which collaboration is in fact an integral part of doing business. A 2016 study showed that some 92% of operators and 94% of suppliers in the North Sea Basin acknowledge that collaboration is essential for their future success in the current low-price, high-cost environment. It also found that collaboration in the oil and gas industry is extremely low compared with others. Achieving and strengthening supply chain collaboration will require re-thinking the current operating model, which has to some extent remained unchanged for decades, with traditional procurement processes, contracts, processes, risk management, and so on. There are many other ways for companies to collaborate – not that it is always easy – for example, through joint ventures (JVs), investing in tech startups, and working with non-governmental organizations and researchers. While digital capabilities will of course help drive collaboration, it is important to remember that good collaboration also requires trust and transparency between operators and service providers.

What will it take?

Innovation in an established industry like ours is not about chasing a variety of ideas to see what will work, but rather focusing on a few bold initiatives. It will also be critical to align metrics and incentives. Today, employees are still ‘incentivized’ strictly by traditional key performance indicators (KPIs) and not, for example, according to risk-taking (fast failure) and how well they collaborate. Innovation teams often operate separately from the core business. We must also continue to examine what other industries do – for example, from a customer perspective, what can we learn from online retail? If we are thinking about refineries, what do manufacturers and mining companies do? Certainly, oil and gas will manage in the short-term, but business as usual is not an option if the industry is to thrive 30 years in the future.

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